Outsourcing: The calculus of migrating jobs

The outsourcing of jobs to lower-cost locations is not new, but it has a chilling new adjective: professional. Advances in communications technology have enabled white-collar jobs to migrate to the developing world as never before - a phenomenon that has provoked an outcry from sectors that had thought themselves invulnerable.

Money Report convened a round table of experts at the Algonquin Hotel in New York last month to explore how job migration is changing the global landscape, and what those changes might mean for investors. Participants in the panel, which was moderated by Erika Kinetz, were:

Eric Johnson, Tuck School at Darmouth, Business Professor Josh Bivens, Economic Policy Institute, Economist Diana Farrell, McKinsey Global Institute, Director Stephen Roach, Morgan Stanley, Chief Economist Edmound Hariss, Guinness Atkinson, Fund Manager

In China, foreign-invested enterprises employ about 3.5 million workers. That number has grown 3 to 3.5 times over the past decade. Add in the subsidiaries funded out of Hong Kong, Macao and Taiwan, you've got another 3.25 million workers. Employment in the information technology business in India is 650,000 right now and is supposed to go up another three to four times in the next five years. You've got a triangulation of evidence which suggests America is short of jobs as never before and the major candidates for our offshore outsourcing are ramping up employment as never before. So, yes, I think two and two is four.

Diana Farrell: This is a big deal in that we see something structural happening. But I would react to the notion that it is a big deal we should try to stop or recognize as anything other than the economic process of change. I think the bigger deal is the fact that we are going to have very serious curtailment of the working-age population.

Josh Bivens: I'm curious about Steve's assertion that outsourcing can explain the sluggish employment situation. If you look at slow growth plus fast productivity, you've got the sluggish labor market right there.

Roach: A pickup in productivity does not have to be accompanied by sluggish employment. There are countless examples, like the 1960's and again the 1990's, of rapid productivity growth accompanied by rapid employment growth. The point is that the relationship between aggregate demand and employment growth looks to me as if it has broken down. That breakdown reflects not just the rapid growth and maturation of outsourcing platforms in places like China and India but also the accelerated pace by which these platforms can now be connected to the developed world through the Internet. These are brand-new developments. This is a huge challenge for service-based economies, like the United States.

Bivens: How much of the insecurity that people think is caused by service-sector outsourcing is in fact just the business cycle as usual? Every time there's a recession, people want to blame it on some underlying structural factor, when sometimes recessions are just recessions, shortfalls in demand that work themselves out.

Roach: We had a China-style GDP growth in the U.S. in the third quarter of this year. Over the period from September through November employment has turned up, but many of those jobs came from the temporary hiring industry. These are service jobs, contingent workers without benefits and significantly lower pay scales. We're getting the GDP growth, and by now any recovery in the past would be flashing green on the hiring front. This one isn't.

With all due respect, I don't know what you guys are talking about. This is a profoundly different relationship between hiring and the business cycle. And I think these jobs are, by and large, lost forever.

Kinetz: Nearly 2.8 million jobs have been lost since George Bush took office in January 2001. In response, he has offered some fairly conventional economic medicine: tax cuts, deficit spending and low interest rates to jump-start a business recovery, which will ultimately create jobs. With the added element of outsourcing, is this kind of calculus still applicable today?

Farrell: Across countries, not just the U.S., the policies you describe are helpful on the margin. But the real engine of productivity growth, which leads to long-term sustainable GDP per capita growth, is innovation. That happens when you create the right competitive environment. Then you get the dynamic we saw in the U.S. in the 1990's, where you had dramatic productivity growth and dramatic job creation.

That's what we should be focusing on: How we do ensure those conditions stay in place? How do we not get frightened and move down protectionist paths?

Roach: Fiscal policy is such a blunt instrument, it can't touch this. Policies can stimulate demand, but they cannot redirect supply from offshore outsourcing back to domestic platforms. That dynamic is determined by a much more powerful arbitrage of labor costs, which macropolicy is unable to control.

Kinetz: How many jobs from the United States, Europe and Japan have been lost to offshoring? Is anyone keeping track?

Bivens: Not really. There are no firm numbers I've ever seen that convince me we're right even really to an order of magnitude.

Roach: There is not going to be a government statistical gathering function in America that's going to even come close to capturing this.

Farrell: It's a global-wealth-creation story over all. The Indias of the world are certainly benefiting. We see that in terms of job growth, which is dramatic; through the rise in consumption, which is showing up as demand for our goods, which is not as rapid as it might be.

And it's ultimately a global wealth story for ourselves. We are getting huge savings we can redeploy in positive ways. Earnings for the activities being done in India by U.S. companies are repatriated. If we have faith in the job creation opportunities of this economy - and that's at some point an open question - we have the ability to redeploy that labor to more productive and higher output use. The framing of this debate as a zero-sum game is false. This is a win-win game.

There is an assumption by protectionists that these jobs are going somewhere else and all this money has been pocketed by CEO's who take it home. A little more sophisticated version is: It's being pocketed by companies in form of profits. One step further and you say those profits are either going to go as returns to the investors in those companies, or they're going to go into new investment by those companies. Those savings enable me, if I am an investor, to consume more and therefore contribute to job recreation, and if I am a company, to re-invest and create jobs.

That's important because I agree that we are migrating jobs away, some of which will never return, nor should they.

Bivens: Within nations, trade tends to redistribute a lot of income. People were worried about the effects of trade on the U.S. manufacturing sector in the 1980's, and some now look back and say, "Well, since the '80's we've created lots of jobs, we've had impressive GDP growth in the aggregate, so all those fears were groundless." I don't think they were groundless. We saw a staggering rise in income inequality in the U.S. during that time, a chunk of which was driven by international trade.

The gains get pretty concentrated in the pockets of capital owners. The people who lose out are the blue-collar workers. Now you've got this class of middle management white-collar workers who are much more insecure about their job prospects, and their labor market bargaining power is being undermined. It doesn't mean we need walls all around the economy, but it does mean we need to get really serious about making sure all these gains are distributed.

Edmund Harriss: Look at what's gone on in China over the last 10 years. There are 300 million people in those eastern coastal provinces who have seen an extraordinary pickup in their standard of living. Now it is people in the developed world who are being left behind. That is very difficult to resolve.

Kinetz: One key piece of the win-win theory seems to be that displaced workers will find new jobs. What does history teach us about how well displaced manufacturing workers have been reintegrated into the work force?

Bivens: The best research on what happens to people displaced from manufacturing is that they eventually find a new job, but they take an average wage cut of 13 percent to 14 percent. The people who are hit hardest are older workers. Also, it's not just the worker who is directly displaced from a sector that is hurt by international trade, it is also every other worker in the economy who has a similar skills profile.

Roach: It's a race to the bottom if we spend all our energy trying to protect existing sources of job creation, as the politicians in the U.S. Congress are inclined to do.

The problem is that globalization is growing asymmetrically, so initially it creates more supply than demand. We're living through that asymmetry right now, and that has caused a potentially dangerous political backlash. The Chinese, for example, are reluctant to transform their habits from savers to consumers because they're losing jobs through the reform of their own economy, and they don't have a safety net. They don't have social security or retirement. As China puts its own infrastructure in place that converts savers into consumers, over time there is a rising tide. But the political process is not that patient.

Kinetz: If protectionism is the wrong answer, explain how the market will solve this. Does government need to intervene at all?

Roach: This is classic election-year posturing by a Congress that is basically responsible for the problem itself and doesn't want to admit it. We have trade deficits with China and Japan because Washington is running the most reckless fiscal policy we've seen in the United States since the late 1960's. They are the problem. It's not the Chinas and Japans and Indias of the world.About two-thirds of the export growth in China over the last 10 years has come from Chinese subsidiaries of multinational corporations headquartered in Japan, the U.S. and Europe and their joint venture partners. These are our companies. It's us; it's not them.

Eric Johnson: Out in the San Francisco Bay Area, we see what look like high-paid, sophisticated IT jobs going offshore, but really they're not that sophisticated. What is happening, for example, with Accenture, is that the role the consultant plays is changing. Low-skill jobs like coding are moving offshore and what's left in their place is the need for far more advanced project-management skills.

Farrell: We will require all kinds of new things for an aging population. Fifteen years ago, you would not have been able to fathom a large number of the jobs that exist today - technical jobs that didn't exist for equipment that didn't exist in facilities that didn't exist.

Harriss: There are two Chinas. In the cities, there is a youth culture, a bar culture, pop music, and a freer flow of information. But anybody over the age of 45 remembers starvation. When they were kids growing up, it was gray, bleak, power shortages, Mao suits, not enough food, eating grass and roots. There's the glitzy world of Shanghai, where it's as Western as can be and there are young hip kids with MP3 players. And then there is another world, too.

Roach: Last year China received $53 billion of foreign direct investment, making it the largest recipient in the world. India got $2 billion. Services don't need FDI. Services just need people and Internet-based connectivity. The service sector outsourcing model is a totally different, radical opportunity for economic development. We've been hearing great stories about India for 35-40 years, and they've never borne fruit. This one seems to be working differently. I'm optimistic that it's a transforming event.

Farrell: A lot of the gains to developing economies, as to our own economy, are in the form of lower prices, higher quality, and broader choice. Since the opening up of the car sector in China, there has been a 31 percent decline in prices. That's a whole year's worth of savings for somebody.

Harriss: There is not much innovation in Asia of the kind we're looking at to create jobs in the U.S. Apart from a few exceptions, what Asia does well is take the latest innovations and production techniques, invest in the most recent equipment and then bring in their powerful advantages in low cost labor, and start to produce. There aren't too many places in Asia where you can say these guys are seriously better than anybody else in the world, with the exception of the Taiwanese foundries, like Taiwan Semiconductor Manufacturing. They've surpassed the Japanese now. Samsung Electronics could probably make that claim for, say, the production of flat panels.

The benefits to Asia are just going to come with more people coming off the poverty line and into the global economy.

Roach: China for all practical purposes has an infinite supply of labor: 400 million in its urban population and another 900 million in the rural area. The average wage of a Chinese worker is still 2.5 percent to 3 percent of the counterpart in the high-waged developed world. Those are disparities that will be around for a long time.

Kinetz: Can China keep labor costs so low and still grow a critical mass of domestic consumers?

Farrell: You are still talking about a pretty significant critical mass of people who are now entering consumption-level incomes: $7,000 to $10,000 GDP per capita. Car sales in China are growing at 26 percent to 30 percent compound annual growth rates. Televisions, refrigerators, mobile handsets all have the same kind of J-curve. You only need 10 percent of the population to have a critical mass of income. I think you can actually have your cake and eat it, too: a long-term labor arbitrage opportunity coupled with pretty demanding consumption growth.

Harriss: The prospects for investing in China are looking better than they have for some time. With the arrival of the consumer on the scene, we're seeing companies that are able to participate in this growth and make money out of it. What investors may be worried about is that we've seen such strong growth recently, maybe it's excessive and maybe China will hit a rock, and we'll go boom-bust. But if the economy isn't as dependent as it was on government spending to keep it moving, then I think investors can be more sanguine.

Areas that have been doing well are basic materials (Anhui Conch Cement); electricity generation (Huaneng Power International); export manufacturing (Techtronic Industries, which makes power tools and supplies for Home Depot); manufacturing for the consumer market, including automobiles (Denway Motors, which has a joint venture with Honda Motor), textile manufacturing; electronic goods (Compal Electronics in Taiwan); and in petrochemicals (CNOOC, an oil and natural gas producer.)

I would set aside those stocks that have suddenly run up on the back of improved China sentiment. There are steel companies out there that shouldn't be.

Bivens: Globalization is good at increasing the productive capacity of the world, but to make sure there are enough jobs for everybody, you need demand to keep pace with that increase in supply. That's where globalization presents a real challenge.

Government's big roles in the future are to make sure global demand matches supply, and to provide social insurance schemes to make sure the living standards of the workers being left behind aren't sacrificed on the altar of global progress.

Roach: Our virtues lie in a flexible and open, technology-friendly, risk-taking, entrepreneurial, market-driven system. This is exactly the same type of challenge farmers went through in the late 1800's, sweat-shop workers went through in the early 1900's and again manufacturing workers did in the first half of the 1980's.

We've got to focus on setting in motion a debate that pushes us into new sources of job creation rather than bemoaning the loss of jobs to others who have the advantage of doing tasks that we're getting priced out of. There are Republican and Democrats alike who are involved in this protectionist backlash. They're very vocal right now, and they need to be challenged.

" Low-skill jobs like coding are moving offshore and what's left in their place is the need for far more advanced project-management skills."

Coding is a low-skilled job?? Am I missind something? After working in the IT field for quite some time, I thought coding/programming was definately not considered "low-skilled". Sheesh no wonder my job as data security administrator got sent to India. My job must have been considered pond scum... or at least definately low-low-low skilled.

People who think coding is unskilled (intellectual) labor are always astonished at the number of bugs and poor application performance they get from their "low offshore bid" shops.

There is a new niche market for small companies that come in and clean up after the mess that is left by "forward thinking VPs" who jump on the offshore outsource bandwagon.

If your coding job is now considered "low skill", then I'm sure that my lan-admin/desktop support job is just one step above ditch digger. I think I'll start sharpening my burger flipping skills. At least they can't ship those jobs overseas. Third World, here we come!

That line made me laugh out loud. And the real point is, the project needs twenty coders but only one project manager, so the interviewee's attempt to suggest that the offshoring is somehow a trade up for the US economy is ludicrous on its face.

Gee how low can the price of a widget drop before Americans say, "Enough. If I'm unemployed, cheap goods won't help me.

This author quotes the U.S. as having a service based economy. Well...we do now. We didn't used to. And that will be our undoing.

When those jobs are outsourced to India, all that will remain is the food industry and auto repair (planned obsolescence.)

Oh and I've already dealt with these new "corporate representatives" and although I admit their attitude is usually better, the service and empowerment is less, which equals a net decline in what was already nothing to write home about.

I guess my point being with the "planned loss" of our manufacturing base and our shift to a service economy, the balance sheets win, and the American worker loses, especially with the current free trade agreements in place.

Stephen Roach: [by conference call from Singapore] Offshore outsourcing is a huge deal. Twenty-three months into recovery, private-sector jobs are running nearly 7 million workers below the norm of the typical hiring cycle. These are shortfalls we have never seen before. In China, foreign-invested enterprises employ about 3.5 million workers. That number has grown 3 to 3.5 times over the past decade. Add in the subsidiaries funded out of Hong Kong, Macao and Taiwan, you've got another 3.25 million workers. Employment in the information technology business in India is 650,000 right now and is supposed to go up another three to four times in the next five years. You've got a triangulation of evidence which suggests America is short of jobs as never before and the major candidates for our offshore outsourcing are ramping up employment as never before. So, yes, I think two and two is four.

"Two and two is four" bump.

When those jobs are outsourced to India, all that will remain is the food industry and auto repair (planned obsolescence.)

Oh, don't exaggerate! Ther'll still be plenty of other opprtunities available: Floors will still need to be mopped, streets repaired, bicycles fixed, porta-potties and septic tanks pumped out ...

These people are just trying to pry positive effects out of a natural result of policies they believe in and support as globalists.

From Americas's point of view, though, how many of those millions and hundreds of thousands of Indians

1) Eat in American restaurants
2) Fix their cars at an American shops
3) Shop in American grocery stores
4) Use American utilities or pay American taxes
5) Buy their autos from an American dealership
6) Rent or buy a house in America
7) Buy gas at American filling stations
8) Have any loyalty to the American people at all

If income and FICA taxes are not withheld from those Chinese and Indian wages, then there is that, too.

That's what the loss of these jobs really means.

Shoot....back in the 60's, I was a computer operator. We were GOD's. Now the function is damn near totally automated.

Now I'm on the software side. We designed developed and enhanced a claims system for a major insurance carrier.

They took it in-house and couldn't handle it. They "outsourced" the development and maintenance of the system to a few of us who "got the band back together" to do the job.

The insuracne company recently adiosed us and gave the business to India. The reason(s) ? In this order:
Quality Work
Less expense.

I wonder how they could do the job better than us ?

Well, what the client is getting is undocumented and non-commented code.

God bless them. Sometimes the low-bidder is the low-bidder for a reason.

People who think coding is unskilled (intellectual) labor are always astonished at the number of bugs and poor application performance they get from their "low offshore bid" shops.

Laughing out loud, but it's stone truth... I think people are going to get very used to the sound of lame excuses delivered in flowery English with a South Indian accent.

d.o.l.

Criminal Number 18F

Sure, just like Limbaugh and the FreeTraitors say: All that matters is what the stockholders make, their profits

Someday someone's going to warn them the peasants are hungry, they have no bread and they'll respond arrogantly "then let them eat cake".

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